Now that these have run up, what would be the best way to trade them now? Wait till after D day see how it shakes out and then trade a few days later?

D day will definitely be an inflection point. The sensible prediction would be for the prices of the preferred to go up a lot or go down a lot after the administration's announcement, but maybe not. WSJ says the administration will present more than one option for congress to consider. One plan would be to put Fannie and Freddie into runoff and then start subsidizing bank cooperatives to start insuring mortgages. However, such new organizations would create uncertainty that would dampen the market for mortgages and almost certainly require a greater government backstop than continuing with Fannie and Freddie.

Plan B would be to continue to support Fannie and Freddie for several years until they can stand on their own. During that time Fannie and Freddie might let the private market handle some of the more expensive mortgages without government backstop when and if the private market is able to do this. In either case, their regulators are said to intend to allow them to charge much higher rates for their guarantees and securitizations.

Plan A looks like a nonstarter to me. If plan B is the one that goes forward, it will be interesting to see if the plan has details about how the US will eventually exit. In that event, it seems logical that the preferred in the public's hands should have much more upside than the common. At the close yesterday, the market value of the common was about four times the market value of the public preferred.

Here's what's happening: Ralph Nader, of all people, says the US should cut the dividend rate on their preferred and let Fannie and Freddie earn their way out of the hole as they are transitioning to cash flow and earnings positive except for the exorbitant rate they have to pay on the government owned preferreds. The rate Fannie and Freddie pay is double the dividend rate the US required AIG, the big banks, et al. to pay.

Financial Times reports that Freddie is lobbying the administration to cut their dividend, and that the administration is sympathetic to that idea. The administration is said to have decided to allow Fannie and Freddie to charge higher, appropriate rates for their guarantees and securitizations. The administration's nominee to head their authority has withdrawn his name, apparently abandoning the plan to draw Fannie and Freddie into letting deadbeats off the hook, as HUD and FHA are doing.

Meanwhile, the short sellers, anticipating a possible buying frenzy when the Treasury's plan(s) is presented to congress, are scrambling to cover, a more difficult task with the often illiquid preferreds than with the common.